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###### Department of the Treasury

###### Internal Revenue Service 

          - 26 CFR Part 1 
          - [TD 9322] 
          - RIN 1545-BG26 

# AGENCY:

Internal Revenue Service (IRS), Treasury. 

# ACTION:

Final and temporary regulations. 

# SUMMARY:

                        This document contains final and temporary regulations under section 1502 of the Internal Revenue Code (Code). These regulations provide guidance to corporations filing consolidated returns. These regulations apply an anti-avoidance rule and revise an anti-loss reimportation rule that applies following a disposition of stock of a subsidiary at a loss. The text of the temporary regulations also serves as the text of the proposed regulations (REG-156420-06) set forth in the notice of proposed rulemaking on this subject in the Proposed Rules section in this issue of the                         **Federal Register**                        .                     

# DATES:

*Effective Date:*                         These regulations are effective April 10, 2007.                     

*Applicability Date:*                         For dates of applicability, see §§ 1.1502-32T(k) and 1.1502-35T(j)(2).                     

# FOR FURTHER INFORMATION CONTACT:

Theresa Abell, (202) 622-7700 or Phoebe Bennett, (202) 622-7770 (not toll-free numbers). 

# SUPPLEMENTARY INFORMATION:

## Background and Explanation of Provisions 

Section 1.1502-35 currently addresses loss duplication. The rule generally applies whenever there is a disposition of loss shares of subsidiary stock or a subsidiary is deconsolidated. The regulation includes several specific anti-abuse rules, including a rule intended to prevent a group from getting the benefit of a loss on the stock of one of its subsidiaries and then reimporting the same economic loss back to into the group (or its successor) in order to claim a duplicative benefit from the one loss. 

The current anti-loss reimportation rule generally disallows reimported losses that duplicate a loss recognized and allowed with respect to the disposition of subsidiary stock. The term “subsidiary” is defined in § 1.1502-1(c) to mean a corporation that is a member of a consolidated group but is not the common parent of the group. Taxpayers have attempted to avoid the anti-loss reimportation rule by first deconsolidating a subsidiary and then selling loss shares of the subsidiary's stock. The loss on the stock is one that was reflected in the subsidiary's attributes at the time of the deconsolidation and is thus one that the anti-loss reimportation rule is intended to address. But because the sale occurs after the subsidiary ceases to be a member of the group, taxpayers take the position that the loss recognized is not with respect to “subsidiary” stock and therefore is not subject to the anti-loss reimportation rule. Thus, after obtaining the tax benefit of its economic loss (on the disposition of the stock), the group would be free to reimport the loss and then (directly or through a successor group) claim a second tax benefit for its one economic loss. 

                    The IRS and Treasury Department believe that the duplication of a group                           ( print page 17805)                        loss distorts group income, and is therefore inappropriate, regardless of whether or not a duplicative recognition of the loss occurs while the subsidiary is a member. In either case, the group would obtain more than a single tax benefit for one economic loss. The IRS and Treasury Department recognize that such transactions remain subject to, and reimportation will be prevented by, other principles of law, such as the Step-Transaction Doctrine and other anti-avoidance rules of law. However, the IRS and Treasury Department have concluded that tax administration would be better served by revising the current anti-loss reimportation rule to address these situations more directly.                 

Accordingly, these final and temporary regulations revise the anti-loss reimportation rule to clarify that losses reflected in the basis of subsidiary stock at the time of deconsolidation may not be recognized and reimported into the group, regardless of whether the stock losses are recognized when the subsidiary is a member of the group. To discourage further structuring to avoid its purposes, the loss reimportation rule is also revised to replace the list of events that cause the application of the rule with a list of criteria that identify reimportation transactions that will be treated as subject to the rule. 

In addition, the temporary regulations add a general anti-avoidance rule under § 1.1502-35T(g)(6), which provides that appropriate adjustments will be made if a taxpayer acts with a view to avoid the purposes of § 1.1502-35. The temporary regulations also remove § 1.1502-35(h) (continued applicability of other rules of law) because it unnecessarily duplicates § 1.1502-80(a), which provides that other rules of law apply to members of consolidated groups unless otherwise provided in the regulations. 

                    The temporary regulations that revise the anti-loss reimportation rule apply to reimportation events that occur on or after                     *April 10, 2007 if they occur with respect to stock of a subsidiary sold on or after March 7, 2002, or with respect to stock of a subsidiary or former subsidiary sold on or after April 10, 2007.*                     The temporary regulations provide a general anti-avoidance rule that applies on or after April 10, 2007.                 

## Special Analyses 

                    It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12666. Therefore, a regulatory assessment is not required. These temporary regulations address situations in which taxpayers inappropriately attempt to recognize duplicative tax losses by attempting to avoid the application of the anti-loss reimportation rule. For this reason, it has been determined pursuant to 5 U.S.C. 553(b)(B) that prior notice and public procedure are impracticable and contrary to the public interest. For the same reason, it has been determined pursuant to 5 U.S.C. 553(d)(3) that good cause exists to make these temporary regulations effective upon the date of publication. For applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6) refer to the Special Analyses section of the preamble to the cross-reference notice of the proposed rulemaking published in the Proposed Rules section in this issue of the                     **Federal Register**                    . Pursuant to section 7805(f) of the Code, these temporary regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.                 

## Drafting Information 

The principal author of these regulations is Phoebe Bennett, Office of the Associate Chief Counsel (Corporate). However, other personnel from the IRS and Treasury Department participated in their development. 

# List of Subjects in 26 CFR Part 1

      - Income taxes
      - Reporting and recordkeeping requirements

## Adoption of Amendments to the Regulations 

Accordingly, 26 CFR part 1 is amended as follows: 

# PART 1—INCOME TAXES 

**Paragraph 1.**                         The authority citation for part 1 continues to read as follows:                     

Authority:26 U.S.C. 7805 * * *.

Sections 1.1502-32T and 1.1502-35T also issued under 26 U.S.C. 1502 * * *.

**Par. 2.**                         Section 1.1502-32 is amended by revising paragraph (b)(3)(iii)(D) and adding paragraph (k) to read as follows:                     

§ 1.1502-32 

* * * * *

(b) * * * 

(3) * * * 

(iii)* * * 

(D) [Reserved]. For further guidance, see § 1.1502-32T(b)(3)(iii)(D). 

* * * * *

(k) [Reserved]. For further guidance, see § 1.1502-32T(k). 

**Par. 3.**                         Section 1.1502-32T is amended by revising paragraphs (a) through (b)(4)(iii) and adding paragraph (k) to read as follows:                     

§ 1.1502-32T 

(a) through (b)(3)(iii)(C) [Reserved]. For further guidance, see § 1.1502-32(a) through (b)(3)(iii)(C). 

                            (D)                             *Loss disallowed under § 1.1502-35T(g)(3)(ii).*                             Any loss or deduction the use of which is disallowed pursuant to § 1.1502-35T(g)(3)(ii) (other than duplicating items that are carried back to a consolidated return year of the group), and with respect to which no waiver described in paragraph (b)(4) of this section is filed, is treated as a noncapital, nondeductible expense incurred during the taxable year that such loss would otherwise be absorbed.                         

(b)(3)(iv) through (b)(4)(iii) [Reserved]. For further guidance, see § 1.1502-32(b)(3)(iv) through (b)(4)(iii). 

* * * * *

                            (k)                             *Effective date*                            —(1)                             *Applicability date.*                             Paragraph (b)(3)(iii)(D) of this section applies to any original consolidated Federal income tax return due (without extensions) after April 10, 2007.                         

                            (2)                             *Expiration date.*                             The applicability of paragraphs (b)(3)(iii)(D) and (k) of this section will expire on April 9, 2010.                         

**Par. 4.**                         Section 1.1502-35 is amended by:                     

1. Revising paragraphs (g)(3) and (h). 

2. Adding new paragraph (g)(6). 

3. Revising paragraph (j). 

The revisions and additions read as follows: 

§ 1.1502-35 

* * * * *

(g) * * * 

(3) [Reserved]. For further guidance, see § 1.1502-35T(g)(3). 

* * * * *

(6) [Reserved]. For further guidance, see § 1.1502-35T(g)(6). 

(h) [Reserved]. For further guidance, see § 1.1502-35T(h). 

* * * * *

                            (j)                             *Effective dates*                            —(1)                             *In general.*                             This section applies with respect to stock transfers, deconsolidations of subsidiaries, determinations of worthlessness, and stock dispositions on or after March 10, 2006. For rules applicable before March 10, 2006, see § 1.1502-35T(j) as contained in 26 CFR part 1 in effect on January 1, 2006.                         

(2) [Reserved]. For further guidance, see § 1.1502-35T(j)(2). 

* * * * *

**Par. 5.**                         Section 1.1502-35T is amended by revising paragraphs (c)(4)(ii) through (j) to read as follows:                     

      ( print page 17806)    
§ 1.1502-35T 

* * * * *

(c)(4)(ii) through (g)(2) [Reserved]. For further guidance, see § 1.1502-35(c)(4)(ii) through (g)(2). 

                            (3)                             *Anti-loss reimportation rule*                            —(i)                             *Conditions for application.*                             This paragraph (g)(3) applies when—                         

(A) A member of a group (the selling group) recognized and was allowed a loss with respect to a share of stock of S, a subsidiary or former subsidiary of the selling group; 

(B) That stock loss was duplicated (in whole or in part) in S's attributes (duplicating items) at the earlier of the time that the loss was recognized or that S ceased to be a member; and 

(C) Within ten years of the date that S ceased to be a member, there is a reimportation event. For this purpose, a reimportation event is any event after which a duplicating item is a reimported item. A reimported item is any duplicating item that is reflected in the attributes of any member of the selling group, including S, or, if not reflected in the attributes, would be properly taken into account by any member of the selling group (for example as the result of a carryback) (a reimported item). 

                            (ii)                             *Effect of application.*                             Immediately before the time that a reimported item (or any portion of a reimported item) would be properly taken into account (but for the application of this paragraph (g)(3)), such item (or such portion of the item) is reduced to zero and no deduction or loss is allowed, directly or indirectly, with respect to that item.                         

                            (iii)                             *Operating rules.*                             For purposes of this paragraph (g)(3)—                         

(A) The terms member, subsidiary, and group include their predecessors and successors to the extent necessary to effectuate the purposes of this section; 

(B) The determination of whether a loss is duplicative is made under the principles of paragraph (d)(4) of this section; and 

(C) The reduction of a reimported item (other than duplicating items that are carried back to a consolidated return year of the selling group) is a noncapital, nondeductible expense within the meaning of § 1.1502-32(b)(3)(iii). 

(g)(4) through (g)(5) [Reserved]. For further guidance, see § 1.1502-35(g)(4) through (g)(5). 

                            (6)                             *General anti-avoidance rule applicable on or after April 10, 2007.*                             If a taxpayer acts with a view to avoid the purposes of this section, appropriate adjustments will be made to carry out the purposes of this section.                         

                            (h)                             *Application of other rules of law.*                             See § 1.1502-80(a) regarding the general applicability of other rules of law.                         

(i) [Reserved]. For further guidance, see § 1.1502-35(i). 

(j)(1) [Reserved]. For further guidance, see § 1.1502-35(j)(1). 

                            (2)                             *Transactions after April 10, 2007*                            —(i)                             *Effective date.*                             Paragraph (g)(3) of this section applies to reimported items if the related stock loss is recognized on or after April 10, 2007. Paragraph (g)(3) (other than paragraph (g)(3)(i)(A)) of this section also applies with respect to the duplication of subsidiary stock loss recognized in dispositions (described in § 1.1502-35(g)(3)(i)(A), as contained in 26 CFR part 1, revised as of January 1, 2007) on or after March 7, 2002, if the reimportation event with respect to that loss occurs on or after April 10, 2007. For rules applicable to losses reimported before April 10, 2007, see § 1.1502-35(g)(3), as contained in 26 CFR part 1 in effect on January 1, 2007. Paragraphs (g)(6) and (h) of this section apply on or after April 10, 2007. For rules applicable prior to April 10, 2007, see § 1.1502-35 as contained in 26 CFR part 1 in effect on January 1, 2007.                         

                            (ii)                             *Expiration date.*                             The applicability of paragraphs (g)(3), (g)(6), and (h) of this section will expire on April 9, 2010.                         

* * * * *

 Linda M. Kroening, 

Acting Deputy Commissioner for Services and Enforcement. 

Approved: March 29, 2007. 

Eric Solomon, 

Assistant Secretary of the Treasury. 

 [FR Doc. E7-6541 Filed 4-9-07; 8:45 am] 

BILLING CODE 4830-01-P